The Fed’s MBS Mortgage Program

Jaime Luque
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Jaime Luque: 1University of Wisconsin-Madison, USA

Chapter 17 in The Subprime Crisis:Lessons for Business Students, 2017, pp 141-152 from World Scientific Publishing Co. Pte. Ltd.

Abstract: During the years of 1999–2006, subprime lending was very popular and it made it very easy for many Americans to attain a home. This subprime lending seemed like a prosperous idea to many people until it proved to be detrimental to the U.S. economy. For example, an individual with inadequate savings and a less than ideal credit score was able to take out a mortgage that often contained a high-interest rate to reflect the risk involved. A commercial investor could then come along and purchase mortgagebacked securities (MBSs), which were a pool of mortgages grouped into one security. These investors profited off of the premium and interest paid by the subprime individuals, so the investments were profitable as long as house prices continued to rise and payments could be made. Once housing prices began to plummet, this subprime individual’s home could worth less than the amount they owed on their mortgage. The individual may then have to default on their mortgage, ultimately affecting the investor that purchased the subprime mortgage through an MBS. Cases such as this were common all over the country leading up to the economic recession, and it was only a matter of time before the Federal Reserve would be forced to step in and intervene in the economy…

Keywords: Subprime Crisis; Great Recession; 2009 Recession; Mortgage; Financial Market; Preventing Recession; 2009 Crisis; Interest Rates (search for similar items in EconPapers)
JEL-codes: G01 G1 (search for similar items in EconPapers)
Date: 2017
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